Zimbabwe economy poised to rise from ashes like a Phoenix?

by Daniel Ngwira, Chartered Accountant

25 Nov 2017 at 14:52hrs | Views

The stock market crashed 30% since the military operation commenced despite the army reporting in a speech that it was targeting criminals around President Robert Mugabe. The interpretation of investors was that this was a military coup de tat which was being disguised. Investors want security of their interests and the sooner they realise that their investment may not be protected, the sooner they look for a safer investment destination.

To put things into perspective, the stock market lost US$4,5 billion in a week. This can be attributed to the political tension prevailing in the country. Losses continued into Monday (November 20) following a disoriented speech by Mugabe as he tried to pacify communities that there was no coup in the country. Investors are not very clear on the endgame hence the panic selling.

The crash of the stock market by 30% is a far cry from the nearly 50% which was witnessed in the immediate aftermath of the Black Friday when the Zimbabwe dollar was beaten 72% following the awarding of a Z$50 000 pay out to war veterans which was not budgeted for.

Ironically, 20 years ago, war veterans were at the centre of the economic collapse of the country. While they deserved the recognition for liberating the country from the jaws of oppressors, it was the management of the pay out that caused the crash. Government could have managed this issue better, but years of neglect mounted pressure on Mugabe to act immediately.

He was advised against the payout and warned of its economic consequences but a political decision was made given the important role played by the war veterans in the power matrix.

Twenty years apart, November will go down in history as the month when our currency crashed signalling the demise of a once-promising economy and at the same time when the country went on a path for renewal two decades later. It was exactly 20 years from Black Friday when Zimbabwe Defence Forces commander General Constantino Chiwenga addressed the media and pronounced the military would not hesitate to intervene to secure the stability of the country which was being threatened by the factional fights within the ruling party.

While it can be argued that the bulk of the upside of the market capitalisation is "fat" acquired as the market was trying to reset as a result of the loss of value by the local currency to the dollar, the anticipated instability which is normally associated with the military interfering with civilian rule outweighed this argument. The Zimbabwe currencies in the country's context include the bond notes, the RTGS, mobile and electronic balances. These are no longer trading at par with the dollar on the parallel market which is where those who want foreign currency can easily find it. The central bank has acknowledged the "scarcity premiums", a watered down acknowledgement of the existence of the drifting away of the market rates from the official rates of the bond notes to the greenback.

The demand and supply of a currency affects its value on the market regardless of the intention of the authorities to fix the value to achieve a political motive. The reason why the Zimbabwean economy is where it is today is due to mismanagement. This is what we have been saying for years as analysts, economists and professionals. It is interesting to note that the ruling party has advanced, as one of its grounds for impeaching Mugabe, mismanaging the economy for 15 years and failure to address endemic corruption. This is not new. Dozens of economic analysts have made this point. What is new is that for the first time the ruling party is seeing things from the point of view of independent citizens. What should follow are massive arrests of those known to be promoting corruption. The ruling party cannot pull him down on this basis and yet fail to show exhibits of the people who advanced the corruption agenda.

Listening to Botswana President Ian Khama giving his last state of the nation address, I was full of admiration when I heard him say: "As of the end August 2017, our foreign exchange reserves were valued at P76,6 billion (US$7,2 billion), which is equivalent to 17 months of import cover. Of the total reserves, the Government Investment Account amounted to P32,1 billion (US$3,05 billion)."

To achieve US$7 billion worth of foreign currency reserves as is the case with the Botswana government takes a lot of discipline and fiscal prudence. The usual practice is for a country to have three months import cover in which case it means Botswana would need only P13,5 billion (US$1,2 billion).

Khama highlighted that his government's "exchange rate policy continues to support competitiveness of local industries in both domestic and international markets by maintaining the stability of the pula against a basket of leading currencies". I hope the new government of Zimbabwe will learn from this statement instead of fixing a currency for political reasons like what has happened over the years.

The reason why Botswana is an envy of many is that at independence in 1966, the country was one of the poorest countries with no infrastructure to write home about. They only had six kilometres of tarred road. Today the country boasts of modern infrastructure. In the new era, Zimbabwe can replicate Botswana's success story. The World Bank reports that "significant mineral (diamond) wealth, good governance, coupled with prudent economic management, has made it an upper middle-income country".

Khama went further to say: "Turning to the budget, the overall fiscal balance for the 2016/17 financial year was in surplus of P1,12 billion US$106,5 million), instead of the P1,10 billion (US$104,6 million) deficit that had been projected. As government, we shall strive to always avoid deficit spending, which if unchecked will erode our foreign exchange reserves and impact negatively on our international sovereign credit ratings. In this respect our prudence was last month rewarded by Standard & Poor's (S&P) who upgraded our outlook to 'stable', while re-affirming our 'A-/A2' credit rating with specific reference to our fiscal management, as well as improved expectations for sustainable economic growth."

This means that Botswana has an investment grade rating. If Zimbabwe could achieve this rating, with its resource and skills base, it could attract massive foreign direct investment, which could change the face of the country including unemployment levels. But the rise of the country's economy from the ashes is not an obvious one. It has to be worked for. At the moment, Zimbabwe has a negative trade balance with South Africa. With the closure of most companies, Workington and Belmont, the manufacturing centres in the Zimbabwean context moved to South Africa. There has been a skills drift from the country into South Africa as a result. Non-skilled labour has gone into neighbouring countries via the bush, a very painful process which I witnessed my countrymen going through in search of a better living.

In the past, the government monopolised economic ideas by shutting out alternative views. This will not work in the new Zimbabwe if we are to be a US$100 billion dollar economy. It was clear that the last cabinet reshuffle lacked the will and capacity to manage the economy, especially replacing Patrick Chinamasa as finance minister with Ignatius Chombo. These were two parallels. Chinamasa was more sellable than Chombo.

Perhaps it is also high time the new president fully exercises his right to appoint ministers from outside of parliament.

Section 104(3) says: "Ministers and deputy ministers are appointed from senators or members of the National Assembly, but up to five, chosen for their professional skills and competence, may be appointed outside parliament." Be that as it may, it should be noted that drawing ministers from parliament presents a possible conflict of interest which jeopardises governance and economic performance.

To build a sound economy, government should restore the confidence in the country. I trust that politicians will listen to the voice of the people. People are happy to see the back of Mugabe, but at the same time they want their views represented in the running of the economy. This means that the incoming government should reflect, as much as possible, inclusivity. This will inspire change. The thousands who marched on November 18 are not Zanu-PF supporters; they are Zimbabweans from all political divides.

Sticking to one party in the centre of the levers of running the economy will be frowned at by Zimbabweans as they will see that what has changed is merely the removal of Mugabe, who by the way, was not corrupt alone but with several other government officials and ministers. It therefore looks like our economy could rebound immediately with the inclusion of opposition in the running of the country. Alternatively, there should be fast-tracked electoral reforms which will give a guarantee of a free, fair and credible election in August 2018. But the risk here is that investors will play wait and see until the next election. Considering the decay of our economy, this is far.

All state boards must be cleansed of officials who are known for incompetence and corruption. The resolution by Zanu-PF that war veterans should be placed in government was qualified; it says for as long as they have the necessary skills. This should be adhered to. The country cannot afford to have people without skills and competencies in positions of power. This will build patronage which destroys the pillars of governance. Extensive reforms must also be made at the Reserve Bank of Zimbabwe, which has been at the centre of our economic demise.

Any failure to manage the transition could achieve the opposite results. The new leadership after Mugabe should focus on performance in all sections of government. Twitter ministers should be weeded out. In Mugabe's government, we had ministers who spent the entire day on social media and on factional fights. This cannot build government and ultimately the country.

A leaner cabinet will do the trick, while fiscal expenditure should be curtailed especially on recurrent expenditure. Both cabinet and parliament cannot be spared in austerity. Any minister or member of parliament who is not happy with this must quit and go into the private sector to make money for himself. It is disturbing to note members of parliament crying for more benefits in this economy which is technically dysfunctional.

Government will need to fully utilise its range of economic levers to bring out the economy from the current slumber and generate jobs for citizens as well as raise revenue. These levers include taxation. The new finance minister should know that to raise more revenue, a country does not necessarily need to raise tax rates. Tax is a thorny issue in the eyes of corporates. Most chief finance officers and corporate treasurers would look favourably at an investment destination with lower tax rates. Lower taxes are a transfer of capital to shareholders. They also reduce the burden for companies in promoting reinvestment. Foreign direct investment flies into the best alternatives. Countries are in competition for this.

The United States is competing fiercely to attract foreign direct investment with President Donald Trump very keen to reduce corporate taxes. He promised Americans huge tax cuts for Christmas. Recently, Bostwana reduced the tax rate to companies who establish themselves in Selebi Phikwe area to 5%. This is where BCL operated and such rates are set, ceteris paribus, to attract investment into the area thus creating jobs for locals.

The South African economy is at very low ebb. With serious planning in Zimbabwe, capital could fly into the country with ease. Zambia, another preferred destination of capital is facing governance issues including a perceived crack down on opposition. All these present an opportunity though it is possible for all countries to win at the same time. Zimbabwe is at crossroads. The post-Mugabe era promises a new dawn economically, but any slight mistake could see the country slip further and becoming a failed state. So far citizens have supported the actions of the army. To translate this into an economic reality where Zimbabweans will be the ultimate winners, government must reform its way of managing the economic affairs.

Ngwira is a chartered accountant, former bank treasurer and former university lecturer. He holds finance and business qualifications. — daniel.ngwira@gmail.com/ cell: +267 73 113 161.